Tuesday, 25 May 2010

There has been a great deal of discussion over the last year or so about the scale, and problem posed, by the record UK government deficit that has emerged as a result of the Recession, with the general consensus that this is one of the most important issues facing the UK over the next few years. The issue of how important this is and if, when and how to close the deficit was a major election issue and a major dividing line between the parties, with a number of different prescriptions for the problem from Conservatives, Labour, Greens, Nationalists, UKIP etc. Despite this, it was widely taken as read that any government elected would have to engage in large unprecedented cuts in public spending and, some commentators have predicted, possibly suffer a massive public backlash as a result.

This week we have seen the start of action on this issue of reducing the deficit, as the Conservative-Lib Dem coalition government announce £6 billion of cuts in public spending, as the Conservatives promised pre-election, as a first step in dealing with the problem. But how large is the actual deficit, how much does this £6 billion contribute to cutting the deficit, and how much of the coming public spending cuts does this constitute?

Just to get a first grip on the type of figures we're dealing with, UK GDP is currently about £1385 billion, having fallen by about 6% from £1460 billion to £1375 billion during the recession and now slightly recovered. Out of this the government's plan at Labour's last budget in March was to spend £704 billion (or 51%). However, even on Labour's relatively generous estimates for growth over the next year it only expected to receive £541 billion in tax leaving the £163 billion budget deficit, the amount the government will have to borrow to meet its spending commitments. This figure is 23% of all government spending and 12% of GDP.

Why does this matter?

Well, firstly because the government has to borrow money at interest, like anyone else, and this rate can vary depending on how likely international investors think it is that we'll screw up massively and have to effectively declare bankruptcy. This interest rate is currently about 4%, meaning that, even if the interest rate stays put, once this money is borrowed in every future year the government will have to spend £7 billion just paying the interest, that's £7 billion we can't spend on public services for every year in perpetuity (as there's sod all chance we'll ever actually pay down any of the debt, the general plan to deal with it just to wait for inflation to steadily magic it away).

Much worse than this though is the current fear about sovereign debt, the generally unthinkable event that countries might actually declare bankruptcy. See Greece for the current focus of this worry. What this means is that international investors are getting scared, and if it does not appear that we have a credible plan to get this deficit down, then there is the risk this interest rate will rise putting up the costs considerably, that £7 billion could easily become £10 billion. Even more wonderfully, because of the way government debt is borrowed, if the interest rate goes up it does not just go up for any borrowing we make in the future, but rather also for all the money we've borrowed in the past as well, thus meaning that the cost of paying the interest on our debt can go up a lot quite quickly, in which case the £7 billion a year cost of all that borrowing could become more like £20 billion a year.

Lastly, there is the connected problem that partially for the above reasons, a country can only accumulate so much debt. The other reason for this is that although we don't currently plan to ever pay down our total debt we do only borrow each time for about 10, 20 years, meaning on a constant basis we are paying back our debts by borrowing the same amount of money again to do so. If it is thought that we have no credible plan for bringing down borrowing then there may come a point when investors simply refuse to lend us the money to do this, except at ridiculous rates of interest, meaning that we can't refinance our current debt and we certainly struggle to increase that debt total (deficit) any further, and have effectively been declared insolvent. Together these mean there is an effective ceiling of how much debt you can get, before it gets prohibitively expensive to borrow any more, especially in the current fragile economic climate.

Currently our national debt is about 62% of GDP, up from about 40% ten years ago and forecast at current rates to rise to 95% over the next 5 years. Our government has historically had relatively low amounts of debt as a country, and this is itself beneficial, both because it reduces suffocating interest payments, and because it gives you more room to manoeuvre in the future. What all this borrowing means is that we are losing our room to manoeuvre in any future crisis and reducing the competitiveness of our economy. This is bad in the long-term, not to mention the more immediate risk of rising interest rates on our debt that may costs us significant sums over the next years that we will then not be able to spend on schools, hospitals, welfare and everything else the government does.

The media has widely reported that the £6 billion announced yesterday is only a down payment on the cuts that are coming, with varying degrees of sensibility or hyperbole in the language used depending on the source and their political allegiances. It is important to get the figures correctly in perspective though. Yes, these cuts are only the first small part of what is coming, but not as small a part as some people seem to be suggesting.

£6.2 billion of cuts were announced of which £0.5 billion will be reinvested leaving a £5.7 billion cut this year. At last estimate that brings the deficit down from £159 billion to £153 billion, still extremely high but (partially thanks to better than thought tax revenues) already considerably lower than the £173 billion Labour were predicting for this year at the in the 2009 budget, when the scale of the debt problem first became apparent.

However, that is divided into the cyclical and the structural deficit. The idea is that the cyclical deficit is that part of the deficit effectively ’caused’ by the recession i.e. by the lower tax receipts and higher welfare spending it brings, and will naturally disappear as we return to steady growth (an admittedly reasonably large if). The structural deficit, however, is that deficit that is not caused by the slump in taxes and hike in welfare due to the recession, but the long term difference between the government's year on year spending commitments to various areas, and the amount it is taking in taxes from the economy.

The Lib Dems and Conservatives before the election both only committed, roughly speaking, to eliminate the bulk of the structural deficit, that part of the deficit that will not disappear even with a return to steady growth, a still considerable £70 billion at last estimates. (Labour only committed to removing half of the structural deficit) They have both accepted £12 billion worth of Labour tax rises, put in place by Gordon Brown before the election, such as the 50p income tax rate. They have also made various tax cut commitments, but these are meant to be evened-out by other tax rises brought in, so in theory cancel out for the purpose of these calculations.

This gives us £58 billion of structural deficit not taken care of by tax rises. The Coalition has committed to eliminating the “bulk” of this over the next 5 years. No one has been willing to state precisely what that means, presumably because no-one can predict precisely what growth and hence tax revenues will be over the next few years and, hence, precisely what any given figure will achieve, so, quite understandably, no-one wants to make one. “Events dear boy, Events”, as Harold Macmillan once said. Or, in more technical terms, the margin of error on all these estimates is quite large, making precision not only impossible, but down-right misleading.

However, it is possible to have some idea. Before the Election the Conservatives said they wanted to deal with the deficit by cutting £4 for each £1 raised in extra taxation. Applying this to the £12 billion of tax rises accepted, we get £48 billion of cuts and a total structural deficit reduction of £60 billion over the next 5 years.

So, we’ve had £5.7 billion of cuts out of £48 billion, roughly . Or, given margin of error and government’s usual ability to over-estimate savings and under-estimate costs, about £5 billion out of £50 billion.

Either way, the cuts recently announced amount to about 10% of the total we are going to get over the next 5 years. Leaving £45 billion left over the 4 years after this one, or about £11 billion a year, unless economic growth severely exceeds expectations, or some other fiscal miracle occurs, and considering the difficulty this will cause public services and people who rely on them up and down the country, may we all pray that it will.

Saturday, 15 May 2010

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Well, after hours of voting, weeks of campaigning, months of preparation and years of looking forward we've finally had the General Election. It was an incredibly mixed night, with all sorts of strange results. So lets see what happened:

Without a doubt, the Conservatives won the election. They got 2.1 million more votes than the next largest party and 49 MP's. They achieved a 4% increase in their share of the vote and 2 million more votes than in 2005. They achieved their largest increase in MP's since 1931 and came decisively top in an election for the first time since 1992. However, their victory was not complete.

The big story of the night is that at the end of the day the Conservatives did not manage to achieve the majority that would allow them to govern safely on their own. They were close, considerably closer than anyone could have predicted from opinion polls a week ago, but they were still 16 off an effective majority. Considering the electoral mountain that the Conservatives had to climb, they still made massive progress,achieving swings as high as 10% in many Labour seats, even some they eventually failed to take. Their progress was deeply un-even,however.

In England they triumphed, achieving 40% of the vote and taking 298 out of 533 seats: A considerable majority of English seats. In England and Wales they achieved a swing of 5.6% from labour, including in areas deeply hostile to them, gaining a 6.8% swing in the North East,though it did them little good in seats. They also managed to almost entirely hold off the Lib Dems across the South and London, despite all the hysteria around Nick Clegg pre-election, achieving swings against the LibDems in both southern regions and taking several seats from them.

This solid progress in England and Wales contrasts sharply with a complete lack of progress in the rest of the UK. In Scotland they made zero progress, their share of the vote was up 0.9% and they didn't get a single seat, leaving them with a desperate 1 seat across all Scotland. In fact, incredibly, in an election where 20% of seats changed hands in England and Wales not a single seat changed hands in scotland. In NI there was dissapointment as well as their allies (since 2007), the Ulster Unionists, fighting under the Ulster Conservatives and Unionists (UCU)banner, failed to gain a single seat, and lost the only seat they held in 2005 to the Independent incumbent.

Looking at the information closely, the swing figures mask the fact that the Conservatives widely gained around 40% of the share of vote lost by Labour over most of the country, apart from Scotland, a figure that itself masks the deeply uneven Conservative progress. In seats that they took the Conservatives regularly hoovered up 80, 90, even over 100% of the lost labour share, giving a significant number of impresssive 8-11% swings, however, in many other seats they made little progress at all, with the BNP hoovering up as much of labour's lost vote in some areas of the North, with the swing figures coming largely from Labour's lost share, rather than any actual transfer to the Conservatives. One thing they will be pleased with, however, is the fact that in seats they already held the Conservatives still achieved considerable swings,
meaning that a lot of these seats are now impressively safe. In fact, the Conservatives now have 125 seats with over 50% of the vote, though, on the other hand, their vote actually fell in 75 seats.

However, this should not detract from the scale of the Conservative achievement. They gained more than a million more votes than Blair in 2005, while Labour acheived 900,000 fewer than Michael Howard did, and if it was not for the skew in the system due to Labour constituencies being, on average, considerably smaller than Conservative ones, they would hold a majority today.

Labour lost and lost badly. The party suffered a historic defeat, losing 91 MP's, 900,000 votes, suffering a 6.2% drop, a 5% swing to their main rivals, their worse result (in terms of votes) since 1983 and their greatest fall in seats since 1931. It was grim. They finished off 2nd by 49 seats and 2.1 million votes.

It was the weirdest thing in the world, then, to hear Gordon Brown on the radio, around Friday lunchtime, sounding more confident and statesmanlike than I have heard him for a while, magnanimously declaring that the government must go on and that his ministers would be going to x conference to discuss y with z important other national leaders, as though he had just been returned with a healthy mandate. And the reason for this is very simple, because as badly as labour did (and they were creamed everywhere outside scotland and the North) expectations were so low that they did a hell of a lot better than most people expected, getting 2% more of the vote than opinion polls suggested and maintaining a healthy block of MP's, 39.6% of MP's on 29% of the vote, considerably more than the Conservatives got in 2005. Moreover, as the Conservatives failed to gain a majority, he remained Prime Minister until someone else could cobble together a majority.

Whereas in 1997 the Conservatives were not only beaten, but routed across the board, being reduced to a small rural English rump, in 2010, although securing a lower share of the vote even than John Major did in '97, labour were beaten but not routed, holding their ground in their heartlands and maintaining a significant number of MP's. All the party's leaders maintained their seats, sometimes even increasing their majorities, and, the Conservatives failed to gain their own parliamentary majority, putting them in a relatively weak position. Labour were lucky. Whereas the Conservative's '97 defeat was compounded by serious tactical voting, in 2010 there was almost no tactical voting against them, with the LibDems particularly failing to gain several seats they should have easily taken. Labour also managed to hold off Respect on their left, the SNP in Scotland, and avoid losing too many votes to Lib Dems or Greens, their opponents on the soft-left.

Labour's electoral strategy was, to the degree it was ever going to be, successful. Although their national figurehead campaign was a disaster, to an extent where even his enemies could not fail to feel sorry for Gordon Brown, their local campaigns were effective and professional. They ran a deeply negative attack campaign, hammering away at their one message, the Conservatives would engage in savage cuts, whereas labour could be trusted to protect public services. This approach combined two important pieces of deception, first just lying about what the Conservatives had said they would cut, especially in terms of benefits for the elderly, something Gordon Brown was called up on in the 3rd leadership debate, but generally Labour managed to widely engage in under the media radar, and, secondly, completely ignoring the fact that Labour themselves had committed to cuts, only slightly smaller than the Conservative's, after the election. Nonetheless this approach was mostly successful, uniting the left behind Labour, instead of seeing it fracturing to SNP, LibDems, Respect, Greens etc. and allowing Labour to avoid electoral meltdown.

Obviously, like the Conservatives, Labour's result varied greatly across the country, with almost the opposite picture to the Conservatives. In Scotland they held totally still, actually slightly increasing their share of the vote on 2005, and this success is the core of labour's relative survival in the whole election. Across England and Wales they suffered a 5.6% swing. In NI their allies the SDLP did well, holding their 3 seats.

Even in England and Wales, the result varies across the Country. The swing was surprisingly uniform, but still this means Labour continues to dominate the North, especially the NE, and is well ahead in Wales. They are also slightly ahead in Yorkshire and London and well behind in the East and West Midlands.

In the South of England, outside London, they are, however, in a terrible condition, as bad in percentage term as the Conservatives in Scotland but in a way in a far worse state as it is across a much larger area. Labour got about 17% of the vote across the South East, South West and Eastern regions of England, an area of some 18 million people, compared to 5 million in Scotland, the Conservative desert. They also painfully gained only 10/196 seats in these regions. As one Labour commentator mentioned after the election, there is now effectively a doughnut of complete Labour vacuum, around Inner London and before you reach the Labour strongholds further north. The thing he did not mention, however, is that this is a doughnut of some 220 seats, as another commentator said, some doughnut.

Liberal Democrats.

MP's: 57(-5) Vote Share: 23% (+1) Vote No: 6.8 million (+0.9 million)

If the big story of the night, in terms of immediate political importance, was the Conservative failure to gain a majority then the biggest surprise and biggest under-acheievement of expectation was still the almost complete collapse of the Lib Dem's sudden bubble of support. Without a doubt the big story of the campaign was Cleggomania, the sudden apparent outpouring of enthusiasm for the Lib Dems and Nick Clegg personally that followed the first ever UK prime ministerial TV debate. Taking the opinion polls going into the final night, the Conservative party was ahead but it was then a toss-up as to whether Labour or the Lib Dems came 2nd in share of the vote for the first time since 1918. There were widespread predictions for the Lib Dems to achieve a increase of 20 or 30 or 40 seats on their 2005 total.

The first sign that something had gone horribly wrong, was the exit poll, released at 10pm, that placed the Lib Dems on only 59 MP's, down 4 from the previous election. This was an ominous sign, but was widely disbelieved when it emerged. However, as it went into the early hours of the morning it became horrible apparent that it was all too true, as the Lib Dems failed to gain seats they should have walked through, and even lost seats they could have easily held onto. I can only imagine the sheer horror they must have felt at Lib Dem HQ as they saw the results come in and realised that it was all too true.

When the dust had finished settling the next morning the Lib Dems had managed to do even worse than the exit poll, itself seemingly incredible only 12 hours before, had suggested, finishing with 57 MP's. It was not merely a terrible quirk of FPTP either. The opinion polls that had only 36 hours before predicted a Lib Dem vote of 26% had proved wrong, with the Lib Dems ending up with only 23% of the vote, only 1% up on 2005 and 6% behind the Labour Party they had seemed so close to overtaking. The sense of a missed opportunity looms even more darkly in looking down the list of Lib Dem target seats, those seats that required the smallest swing to the Lib Dems to gain. Whereas the Conservative target list, 116 long, now has a healthy block of blue, the Lib Dem targets have been barely touched. Labour seats that required only a tiny swing to go remain red, after, in some cases the Lib Dem and Labour vote fell equally with it shifting straight to the Conservatives, though not enough to give them the seat, leaving labour in precarious first place.

This should not be taken to say that the result was entirely bad for the Lib Dems. Despite their poor result they did finally secure their main hope for the last 20 years, holding the balance of power in a hung parliament, one hell of a consolation prize. They will now almost certainly form an integral part of the next UK government, albeit either in coalition with, or through supporting, a much larger party. They also achieved their highest share and number of votes since 1987 and (apart from 2005) won the most seats since 1929. This is a more marked achievement when you realise that their 2005 share was considerably buoyed by protest over the Iraq war, to retain and actually increase on those votes was an achievement, and, if it were not for the bubble following the 1st debate it would be said that they did very well, compared to
how they were doing in polls pre-debates.

The Lib Dems fell back moderately in Scotland, though maintaining their tally of seats. They achieved a small swing against Labour across most of England, but, their small loss largely resulted from a moderate swing against them to the Conservatives across the South of England, where they now constitute the 2nd largest party behind the Conservative party, and especially in their traditional heartland of the South-West. Interestingly, they also achieved a sizeable increase in their tally of seats where they are either in 1st or 2nd place, i.e. seats where they are one of the two main parties in the running, a crucial position under FPTP. This figure rose from 250 to 299, suggesting a continued divergence of the country away from a straight Labour, Conservative battle and an improving Lib Dem position below the surface, so to speak.

The Other parties had an incredibly mixed general election, with some notable successes and notable failures, but no overwhelmingly positive or negative picture anywhere. In a number of cases a party either did well in votes but poorly in seats, or did well in seats but poorly in votes regardless. Following the 2009 European Election and the Expenses scandal there was a great deal of speculation that voters would abandon the major parties in considerable numbers and flock to the minor parties. This was one of the great debates of the opinion polling leading up to the election, with one block of polling companies forecasting votes of up to 18% and another block forecasting around 10%. The end result was 11.8%, so considerably closer to the figure suggested by the sceptics.

Moreover, the number of seats held by Others fell slightly. This is firstly because this category includes all NI seats, as neither Conservatives, Labour of Lib Dems are major players there, and so the figure takes no account of the changes there. In Scotland the SNP failed to take any seats, as previously said, Scotland was weirdly static at this general election, though their vote did increase modestly, at the expense of the Lib Dems. In Wales, Plaid Cymru managed to gain an extra seat from Labour, (increasing their representation by 50%) though their share of the vote fell slightly, though not doing as well as they'd hoped (they'd been after another seat). In England, both Independent MP's lost their seats, with those seats returning to what could be considered their natural homes, One Welsh independent labour rebel lost to Labour, one Kidderminster hospital concern lost to the Conservatives. Respect, the other minor party in the 2005 parliament also lost its seat in Bethnal Green and Bow. The party suffered badly at the election taking none of the three seats they had been in a good position to take from Labour, and losing its only representation.

The three major 'minor' parties in England had varyings nights at the polls. The big achievement of the night was the triumph of Caroline Lucas, Green party leader, in Brighton Pavilion, who squeaked home to become the UK's first ever Green Party MP. This was a real triumph for her personally and for the Greens. However, it masked a disappointing result nationwide, with the Green's over-all vote barely moving on 2005, in an election where it would be thought that their hard left-wing, environmentalist, populist line would be widely popular. The contrast is striking with the other two main 'minor' parties. The BNP failed miserably in their attempt to gain parliamentary seats, with Nick Griffin losing votes in Barking, as Labour's Margaret Hodge actually increased her vote after a successful anti-BNP campaign. Nationwide, however, in terms of votes, there was a very different story, with the BNP nearly tripling their vote, scoring 563,000 (up from 192,000 in 2005). There was a similar story for UKIP, arguably the UK's 4th largest party. Their flagship attempt to gain a seat failed, with Nigel Farage failing to unseat the House of Commons Speaker John Bercow, and embarrassingly even coming 3rd in that seat to an explicitly Pro-EU Lib-Dem leaning candidate, little more than 24 hours after almost getting himself killed in an air-crash during some last minute polling day campaigning. Again, nationwide, and in terms of votes, UKIP triumphed, increasing their vote by 50% and scoring 917,000 votes, more than any minor party has ever done before and, for reference, well over triple the Green vote. It is, also, interesting to note that although UKIP are stronger the further south and west you go and the BNP stronger the further north and east you go (in England), their combined vote is actually quite similar across the country, uniformly polling 5-7% in every region and getting 6% over-all in England, and with the English Democrats (the other right-wing minor party) the ED/UKIP/BNP gained 1.5 million votes (up from 800,000 in '05).

In NI there was one dramatic switch of the election, with DUP leader and NI first minister Peter Robinson dramatically losing his seat to the Alliance, a small Lib-Dem aligned, non-sectarian party that has never before achieved Westminster representation. Apart from this though it was no-change, with Sinn Fein, SDLP and the DUP holding all their other seats. Sinn Fein did manage to achieve the closest win of the whole election, holding onto one seat by an, eye-wateringly close, 4 votes. As previously said the Conservative aligned UUP, running as Ulster Conservatives and Unionists (UCU) failed to make any breakthroughs. The TUV (traditional unionist voice) party, a hardline splinter from the DUP, that some had expected to cause the DUP serious trouble failed as well, getting a puny 4% of the NI vote.

Outside these parties, it was a good election for independents in some ways, with many gaining respectable shares of the vote, and standing in record numbers, and bad in other ways, as both the only two independent held seats fell, and most of the respectable independent totals were gained by former, disgruntled Labour or Conservative ex-MP's or hopeful candidates, who failed to gain their preferred party's nomination, generally either due to party discipline problems or intra-party ideological disputes.

The Hard Left did particularly badly at this election, despite hopes that it would be able to capitalise from Labour unpopularity, despite the hard-left in England and Wales coming together in the form of an electoral coalition. Both the Scottish Socialists and the TUSC (trade union and socialist coalition) polled badly, the TUSC getting a pitiful 0.04% of the vote in England. Respect also did badly, losing its only MP, as, as said before, Labour were surprisingly successful in consolidating the left-wing vote across the UK. The hard-left did especially badly compared to the 320,000 votes NO2EU and Socialist Laboiur managed only a year before in the European Elections.

Two other parties that did badly by this same metric were the Christian party and English democrats, who between them polled 530,000 votes in the European elections but at this election only managed some 82 thousand. This is to be compared to the BNP who gained 930,000 in the European Elections and then 540,000 votes this year.